Hopes proved somewhat short-lived that the bottoming out of economic surprise indicators might indicate a trough in the deteriorating outlook for global growth. Disappointing survey readings, especially in the manufacturing sector, continue to highlight the extent to which the increased trade tariffs between China and the US have slowed the global economy. A revised estimate for Eurozone GDP for Q2 showed growth slowing to 0.2% quarter-on-quarter. Manufacturing surveys were a big miss relative to consensus, with new orders falling at the fastest rate for seven years. Employment grew at its slowest pace since 2015 and there are signs this weakness is bleeding into the service sector, with expectations for future growth near the gloomy levels in 2013. In China, weak Producer Price Index readings increased concerns over deflation, with companies cutting prices to offset weak demand. Post the month end weak manufacturing readings in the US also confirmed its economy was being impacted and rounded off a difficult month for the President Trump, who faced the initial phase of impeachment proceedings over conversations with the Ukrainian President.

An attempted rally in US 10-year government bond yields from depressed levels not seen since the financial crisis faded and investor focus shifted to central bankers, what monetary tools were left in their armoury and how effective these might be in the face of persistent below trend growth. European Central Bank President Draghi used one of his last press conferences to implore national governments to undertake fiscal stimulus measures in order to stimulate growth. In the meantime, the US central bank delivered an expected 0.25% interest rate cut and the European Central Bank confirmed a widely anticipated package of stimulus measures.

Domestically, there were two significant political developments, which combined to allay fears over a potential cliff-edge Brexit departure on the 31st of October. Firstly, the Benn Act received Royal Assent during the month, requiring the prime minister to seek an extension to Article 50 until January 2020 if MPs haven’t approved a deal in a meaningful vote. Secondly, the Supreme Court ruled the Prime Minister’s proroguing of Parliament was illegal, calming fears that the Prime Minister could circumvent it to drive through a No-Deal Brexit. UK domestic stocks accordingly rebounded.

The TB Wise Multi-Asset Income fund enjoyed stronger performance over the month of September up 3.9%, compared to a rise 3.5% for the CBOE UK All Companies Index and particularly when compared to the average fund in the IA Flexible sector, which rose 0.8%. The fund saw a reversal in performance from a number of our domestically-exposed holdings as fears over a disorderly Brexit receded. Holdings in the financials sector bounced as long term bond yields appeared to have found a floor. In particular, Legal & General, Randall & Quilter, Aviva, Standard Chartered, Royal Bank of Scotland all rose over 10% during the month. We highlighted last month how attractive certain yields with the UK Property sector appeared and are happy to see British Land and U&I rising more than 10% and New River Reit rising 19% over the month. Our utilities holdings, Ecofin Global Utilities & Infrastructure trust and Pennon, also gained strongly on the back of strong investor appetite, a high NAV discount and news that the latter was to undertake a thorough strategic review.

During the month, we added three new holdings to the portfolio, easyJet, Polypipe and Provident Financial and added to Alliance Pharma and Lookers, among others. Easyjet has seen its share price fall significantly since the Brexit vote, reflecting concerns over the outlook for demand as well as recent margin pressure on the back of short-term excess capacity in European markets. Well-capitalised and well-run, the company should benefit the disappearance of less efficient competitors. With an excellent long-term track record of growth, the shares trade on a cyclically-depressed valuation whilst our confidence has grown margins can revert back to previous levels. Polypipe is a high-quality manufacturer of plastic piping systems, whose growth is supported by regulatory tailwinds and replacement demand for legacy products. Provident Financial has significantly underperformed following the self-inflicted issues in its home-collected-credit division and regulatory scrutiny of its Vanquis division. Well-capitalised, we believe there are signs a corner has been turned operationally and have tentatively initiated a position. Halfords and McColls have been sold as we have concerns over the strength of their business model and balance-sheet.

Philip Mathews 30 Sep 2019
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